Summit Over, Schmidt, Mitterrand Tackle Economies

By Bradley GrahamBy Bradley GrahamJuly 24, 1981

Unable to talk President Reagan into taking steps to bring down U.S. interest rates, West German Chancellor Helmut Schmidt is turning Washington's tight monetary policy to political advantage by blaming it for forcing deeper cuts in Bonn's own budget.

In post-summit comments that have been carried prominently in the West German press, Schmidt said that high U.S. interest rates will require Bonn to take more "cruel" steps in coming budget talks to reduce government borrowing in an effort to ease pressure on West German interest rates.

While Schmidt never expected Reagan to pledge a relaxation of interest rates during the seven-nation conference of leaders in Ottawa earlier this week, the Bonn leader's attempt now to use the United States as a scapegoat reflects the pressure on him to rally public support for unpleasant sacrifices his government plans to ask West Germans to make in the next few months.

Other remarks by Schmidt and his aides following the summit conference reflect general satisfaction with the outcome. Schmidt praised the teamwork he had with French President Francois Mitterrand, whom he had talked to in Bonn the weekend before to coordinate European positions on East-West trade, defense, energy and other issues.

Bonn officials took special pride in the defense they gave at Ottawa of European trade with the Sovit Union and, in particular, of a planned natural gas pipeline project, a six-nation European effort for which Bonn is supplying much of the steel and financing.

As if to underscore Europe's determination to go ahead with the deal despite U.S. misgivings, a Deutsche Bank official yesterday signaled a breakthrough in the long credit negotiations with the Sovit Union over a major part of the financing for the project. The breakthrough involved preliminary agreement to negotiate on a new credit formula involving less than half of the roughly $4billion discussed in earlier talks.

With talks on Bonn's 1982 budget scheduled to intensify this weekend between Cabinet ministers and party coalition partners, West German attention to this problem is strong. The negotations are viewed as a major test of the 12-year-old ruling partnership between Schmidt's Social Democratic Party and the more conservative Free Democratic Party.

West German papers are filled with speculation about the cuts to be proposed to meet Finance Minister Hans Matthoefer's announced goad of holding the budget to roughly $100 billion -- a feat that will require cuts of up to $8.2 billion, equal to about 1 percent of West Germany's gross national product.

For the Social Democrats, whose years in power have developed the Bonn government into a supply house of social benefits, the prospect of trimming welfare programs is deeply unsettling. For a public accustomed to steady growth and a government of increasing favors, the prospect of reductions is downright threatening.

Warnings of budget cuts have been coming for weeks in the wake of the slowed economy and weakened mark, but the chance to lay part of the blame outside West Germany for what are clearly unpopular measures is new.

Schmidt was warned today in several newspaper editorials -- just as he has been cautioned recently by the central bank and government economic advisers -- not to use U.S. interest rate policy as an alibi for overdue economy measures.

The Independent Stuttgarter Zeitung said: "The attempt to blame Washington for what the German citizen is in for is regrettable for two reasons: first, it supports those who already have anti-American feelings; and second, this kind of policy doesn't help create the basis for international trust that was so often spoken of in Ottawa."

It has taken more than a year of economic deterioration for Bonn to get serious about tackling its spending problem. The first startling indication of West German overconsumption came in 1979 when the current international payments account, which measures trade plus some financial transactions, showed a deficit for the first time in 15 years. The deficit tripled to about $12 billion last year and is expected to deepen this year.

Government spending was an issue in last year's election campaign with opposition candidate Franz-Josef Strauss and the Roman Catholic Church drawing attention to recent sharp increases in Bonn's debt. When the election gave the Free Democrats a stronger hand in governing with the Social Democrats, they pressed for budget cuts last autumn but won only about $750 million worth, plus a pledge from the Social Democrats to hold the 1981 spending increase to 4 percent.

But the increases ran over 7 percent because of unexpected increases in unemployment compensation, defense overruns, aid to Poland and higher interest payments on government debt.

International confidence in the mark has eroded, pushing it down more than 25 percent against the dollar since the start of the year and a strengthening is seen now as depending on how well the Bonn coalition meets its 1982 budget target.

Bonn has sought to finance its increased spending through debt rather than raising taxes. But government borrowing has helped West Germany's real interest inhibiting private investment[WORD ILLEGIBLE] year, West Germany resorted to[WORD ILLEGIBE] borrowing abroad, largely from[WORD ILLEGIBLE] ducing companies, where it obtained[Word ILLEGIBLE] about a third of its gross credit need.

During the 1975 recession, there also was much talk here about the need to cut West Germany's social welfare programs, but no major structural changes resulted. At that time, however, West Germany still had an international payments surplus and a strong currency.